The IRS List of "Bad Banks" is Up to 95: What You Need to Know About New OVDP Penalties

The IRS List of “Bad Banks”

The IRS updated its list of “Bad Banks” last month, which is now up to 95 banking institutions. This list will continue to grow as Swiss banks and foreign financial institutions come under more intense scrutiny from the Department of Justice to force public disclosure. So if your client’s bank is on the list, he or she should be made aware that the current Offshore Voluntary Disclosure Program penalty is now 50 percent. It is vital to disclose all necessary information before it is too late.

OVDP: The offshore penalties continue to grow

The IRS increased the offshore disclosure penalty percentage from 27.5 percent to 50 percent last year, according to Professor Frank L. Brunetti’s Tax News blog. What this meant was that taxpayers could avoid the 50 percent offshore disclosure penalty if they submit a pre-clearance letter to the IRS before a financial institution came under investigation for public disclosure. But the penalties for not submitting this pre-clearance letter before a public disclosure are strict.

For instance, let’s say your client has assets in a foreign bank account valued at $3 million and an additional $4 million in offshore real estate purchased with the assets from that offshore account. That $7 million would be subject to a 50 percent penalty, which would be $3.5 million. This is significant because the previous 27.5 percent would have still been a substantial amount, but only $1,925,000. So your client would be required to pay an additional $1,575,000. No small chunk of change. Especially when you consider that there is also the risk that during the investigation your client could lose the OVDP criminal amnesty – all because you client did not submit a pre-clearance letter.

The OVDP targeting Swiss bank accounts

Certainly it is no secret that Swiss banks figure prominently in the top 10 on the IRS list of “Bad Banks” and this is partly due to the settlement reached between the Department of Justice and the Swiss banking system in 2014. This settlement led to the public disclosure of more than 300 U.S. account holders with more than $2 trillion in assets within the Swiss banking system. Needless to say, the Swiss are expected to continue to be a target of the IRS and the Department of Justice in the coming years.

One thing your client needs to consider is that the IRS will not accept ignorance as a plea anymore, regardless of where your client owes taxes on those assets. In addition, if you yourself have come to find that your bank is on this “Bad Banks” list, consult an experienced tax attorney for advice.